Liability for comfort letter?

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#1
TY20XX  
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It's pretty clear most tax preparers are reluctant to provide a comfort letter since the lender is trying to shift Liability.

Has any EA, CPA, or tax preparer ever been held liable for sending this letter?
 

#2
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I would assume so, also would depend on what exactly was in the letter.
If a client defaults on a note, they will look for anyone to blame so they can try to collect instead of eating the loss.

If you write a letter saying, for example, that a sole S corp owner taking $100,000 from the business as a down payment for a personal residence, and that $100k will not adversely impact the operations of the business... and then the business goes belly up in a year, the officer loses their income and defaults, you will probably be in an uncomfortable position. (I have seen very similar requests to this example from banks.)
 

#3
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Many years ago (around 2006) my partner issued some type of comfort letter and the client ended up defaulting on the loan and filing for bankruptcy. We received a copy of the original letter issued in the mail asking us to confirm if we wrote letter. Not sure but I think it was from Fannie Mae

Handed the request over to a lawyer and he responded and we never heard another thing.

I have never heard or read of a CPA being held liable for writing one.

Of course we would never issue one again
 

#4
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BerkshireCPA wrote:Many years ago (around 2006) my partner issued some type of comfort letter and the client ended up defaulting on the loan and filing for bankruptcy. We received a copy of the original letter issued in the mail asking us to confirm if we wrote letter. Not sure but I think it was from Fannie Mae

Handed the request over to a lawyer and he responded and we never heard another thing.

I have never heard or read of a CPA being held liable for writing one.

Of course we would never issue one again


Similar thing happened to me a few years ago except I do NOT write the letter. My then client forged it and gave it to bank.


I received an inquiry from the banks audit department. He was no longer a client so I simply didn’t respond but
I couldn’t believe someone would do that
 

#5
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southparkcpa wrote:Similar thing happened to me a few years ago except I do NOT write the letter. My then client forged it and gave it to bank.


The same happened to my partner about 3 years ago. We got to fire the client immediately, and have refused to write a comfort letter since...
 

#6
ATSMAN  
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This matter has been a problem for us for a long time and the worst offenders are mortgage brokers who will actually tell a borrower with questionable credit to have their CPA/Accountant certify the income. I went to a seminar once and the speaker gave some good advice for us. Basically you have to weigh the client relationship vs. personal liability. His suggestion if you MUST issue a letter for sake of client relationship is to caveat your position. It is CYA to the nth degree!
 

#7
AlexCPA  
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I've said it in other threads and I'll say it again:

The sooner tax preparers refuse to respond to these ridiculous requests, the sooner they'll stop asking.
Even more of my antics may be found on YouTube:
https://www.youtube.com/channel/UCXDitB ... sMwfO19h7A
 

#8
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Awhile back I was visiting my dad when my husband called me to say a lawyer called my house asking about some business issue he didn't understand. Turned out there was a mortgage broker in town who had written a loan for someone who was a client and bypassed me entirely, created a letterhead in Word and wrote a comfort letter over my signature. The cient was in the process of losing their home . And a couple of years ago, another mortgage broker dictated to my client, who is also a friend, exactly what she wanted to see in the letter from me. I told her I couldn't sign that letter, provided one of my own and the broker edited that one for my signature. I refused to sign her edited version and told my client why, but that I would sign the letter I had written. My letter pretty much said nothing about the client's ability to pay, but rather that she had been my client for a number of years and I had prepared her returns and there is a caveat in the letter that it is not my responsibility to pass judgement on the clients credit worthiness nor is my letter to be used in making a decision about the client's ability to pay and my letter is not a substitute for the broker doing her own due diligence. I'm pretty sure that was what the broker wanted to have removed.
 

#9
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The last couple I have had request them, I told them I could not provide the letter. Both lenders told clients they required them. I advised client that they should find another lender, that everyone did not require them. Both got the loans without the letter. That is going to be my approach now-tell them to tell the lender I advised them to take their business to someone that didn’t require it.
 

#10
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Seaside CPA wrote:The last couple I have had request them, I told them I could not provide the letter. Both lenders told clients they required them. I advised client that they should find another lender, that everyone did not require them. Both got the loans without the letter. That is going to be my approach now-tell them to tell the lender I advised them to take their business to someone that didn’t require it.


I have done exactly this with the same results.
~Captcook
 

#11
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TY20XX, this subject comes up form time to time on the board.

I will not write these letters under any circumstance - and it's in my engagement agreement (and my sales literature).

If a client needs an attestation or certification (such as from an independent audit), let them go to a firm that has the experience and insurance to accurately provide it. These generally cost $10,000 to $20,000 for simple situations.

A tax practitioner that does this for free or for cheap is not providing what they are really asking for but they are accepting all of the liability that comes with it. It's WAY beyond scope.
 

#12
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ItDepends wrote:It's WAY beyond scope.


I think Tod's nailed this.

Isn't this, in a very general sense, where most accounting professionals get sideways? Not just with comfort letters, but in all we do. Most professionals say 'yes' to most of what the client requests. Just because you can charge a billable rate for it doesn't mean you've priced it appropriate to the nature of the engagement.
If there was one exercise we should all perform more often, it's setting clear expectations of the client concerning what work we perform and how we perform it.
~Captcook
 

#13
Wiles  
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A comfort letter is neither an attestation nor a certification. It's the same standard we are agreeing to when we sign the tax return. Here are examples of my most recent letters:

We are engaged to prepare the Federal and State corporate income tax returns for XX Corporation.

It is our understanding that YY owns 100% of the stock of XX Corporation.

Our services, including this letter, are based on information provided to our firm by the officers and management of XX Corporation. We have relied upon their representation that the information they provided to us was complete and accurate to the best of their knowledge. We have not audited, reviewed or otherwise verified any of this information.


We are engaged to prepare the 2020 Federal and State individual income tax returns for [Name]. These income tax returns include a Schedule C for [Name] under the business name [Business Name] located at [Address].

In the process of preparing their income tax returns, [Name] have represented to us that their business remains active and will continue to be active into the foreseeable future.

Our services, including this letter, are based on information provided to our firm by [Name]. In preparing these returns, we relied upon their representation that the information they provided to us was complete and accurate to the best of their knowledge.

We have not audited, reviewed or otherwise verified any of this information.
 

#14
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Wiles wrote:A comfort letter is neither an attestation nor a certification. It's the same standard we are agreeing to when we sign the tax return.


I see two questions here.

One, can we do this?
That is, are we legally able to issue a letter stating what the banks want us to say? With the language they provide, the answer is 'no'. However, are we legally able to issue a letter stating the information Wiles notes above? I think the answer is 'yes'. We're not stepping outside the boundaries of what we can legally state and be in accordance with professional standards (if subject to those).

Two, should we do this?
That is, should we, as a professional group, continue to provide letters that mean nothing, say nothing, and are thorns in our side when having to carefully articulate to both our clients and their lenders what we can and can't say in a letter of this nature? To that, I would offer a strong 'No'.

As somewhat of an aside, if there was truly no liability exposure for any of us in providing this letter, then there is truly no value in us providing it.
~Captcook
 

#15
Wiles  
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That is, should we, as a professional group, continue to provide letters that mean nothing, say nothing

I know. I chuckle every time I send one of these. It's not the only silly thing us professionals do in this line of work.

As somewhat of an aside, if there was truly no liability exposure for any of us in providing this letter, then there is truly no value in us providing it.

There is value to our client who wants to get a loan and to the underwriter who wants to check a box.
 

#16
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Wiles wrote:As somewhat of an aside, if there was truly no liability exposure for any of us in providing this letter, then there is truly no value in us providing it.

There is value to our client who wants to get a loan and to the underwriter who wants to check a box.


Of course, but this is the symptom and I'm speaking to the disease.
~Captcook
 

#17
Wiles  
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But refusing to write comfort letters for my clients is not the remedy.

I will spend more time fighting my client and the underwriter over the request than I will kicking out one of these meaningless letters. And no bad will.
 

#18
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Wiles wrote:But refusing to write comfort letters for my clients is not the remedy.

I will spend more time fighting my client and the underwriter over the request than I will kicking out one of these meaningless letters. And no bad will.


Amen Wiles. There's a balance here. As I thoroughly explored here: viewtopic.php?f=11&t=21283

The bankers and loan officers are clearly stepping on toes when they ask for these things. We could easily refuse. BUT, refusing is often at the detriment of our clients, for whom the loan or mortgage would be beneficial.

For the clients who have been with me more than a year, my approach is to just give a B___ S___ "comfort letter" when asked. It's not worth the paper it's written on. Says that I prepared the tax return from information provided and nothing else. I guarantee nothing. Best of luck.

If the banker / loan officer has a problem with that, I immediately request we hop on a conference call... I'll roast them alive.

With class and professionalism of course... :?

Most of the time these lenders are completing a checklist. Give them something worthless to throw in their shoebox. Make the client's life easier.
 

#19
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Wiles wrote:A comfort letter is neither an attestation nor a certification. It's the same standard we are agreeing to when we sign the tax return. Here are examples of my most recent letters:

We are engaged to prepare the Federal and State corporate income tax returns for XX Corporation.

It is our understanding that YY owns 100% of the stock of XX Corporation.

Our services, including this letter, are based on information provided to our firm by the officers and management of XX Corporation. We have relied upon their representation that the information they provided to us was complete and accurate to the best of their knowledge. We have not audited, reviewed or otherwise verified any of this information.


We are engaged to prepare the 2020 Federal and State individual income tax returns for [Name]. These income tax returns include a Schedule C for [Name] under the business name [Business Name] located at [Address].

In the process of preparing their income tax returns, [Name] have represented to us that their business remains active and will continue to be active into the foreseeable future.

Our services, including this letter, are based on information provided to our firm by [Name]. In preparing these returns, we relied upon their representation that the information they provided to us was complete and accurate to the best of their knowledge.

We have not audited, reviewed or otherwise verified any of this information.



But this is not what my clients' banks are asking me to write for them.

They are asking me to verify that they are self employed, and for how long.

They are asking me if the business will continue to be viable.

They are asking me to sign P&Ls.

I responded to a request such as this with a letter like that once and it resulted in the client becoming extremely upset with me and I lost the client. He was pretty upset that I would waste everyone's time like that. True story - but I might have lost him by not writing the letter anyway. But maybe not had I referred him to an independent auditing firm. Maybe then he would have understood (when he saw the price tag).

I also understand that many of them don't even look at it, so you write "nothing" like this, they check the box, and the client get's the loan.

Still, it's beyond scope. I'm not an auditor. I'm not going to file a legal title transfer for the client, get him out of a parking ticket, sell him insurance, or wash his car either. Instead, I'll refer him to other professionals that provide these services.
 

#20
Wiles  
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They are asking me to verify that they are self employed, and for how long.
They are asking me if the business will continue to be viable.


Yes. These are some of the usual requests. The underwriter requests whatever, we give them something close to that. I am sure I have written a hundred of these. Only once (that I know of) did this not work. In that case, my client and the underwriter figured out another solution and did not involve me. And no bad will by my client.

Signing P&Ls - That's a whole different subject. We all know we can't do that.
 

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